In response to the directive from the Central Bank of Nigeria (CBN) to raise new capital and strengthen their positions in the market, Nigerian banks are anticipated to turn to capital market activities for recapitalization, a 2024 outlook report by FBNQuest stated at weekend.
This move follows concerns raised by the CBN Governor, Olayemi Cardoso in 2023 regarding the banking sector’s ability to support a projected $1 trillion economy within seven years.
Cardoso, while speaking at the 58th annual Bankers Dinner, said that a stress test performed on Nigerian banks revealed that while they would withstand mild to moderate stress, they would be unable to service a $1 trillion economy projected by Tinubu-led administration in seven years, hence the need for recapitalisation.
He said, “Considering the policy imperatives and the projected economic growth, it is crucial for us to evaluate the adequacy of our banking industry to serve the envisioned larger economy. It is crucial to evaluate the adequacy of our banking industry to serve the envisioned larger economy. It is not just about its current stability. We need to ask ourselves, can Nigerian banks have sufficient capital relative to the finance system needed in servicing a $1 trillion economy shortly, in my opinion, the answer is no, unless we take action. As a first test, the central bank will be directing banks to increase their capital.”
While the full implementation of this directive is pending, investors have begun positioning themselves in the stocks of Tier-1 banks listed on the Nigerian Exchange Limited (NGX). Additionally, there were reports of potential consolidation in the sector, with larger banks eyeing smaller and weaker ones for possible mergers and acquisitions.
Hence, FBNQuest through its 2024 outlook report titled; Navigating the current economic landscape, whilst listing key themes expected to shape banks’ performance, said that Nigerian banks may decide to leverage capital market activities such as rights issues, private placements, and bond issuances to bolster their capital levels.
The report said, “We expect more capital market activities from banks in 2024 in a bid to shore-up capital levels. These activities allow banks to raise funds from investors, thereby fortifying their capital base”.
It stated that the interest rate environment would remain elevated and translate to improve net interest margins for the banks and that the increase in cost of funds would be offset by growth in interest income. “In our view, improved asset yields will be accompanied by risk asset expansion.
In the full year of 2024, we expect banks to grow their loan book modestly while seeking quality exposures.
We expect movement in the naira to be range-bound and as such not resulting in drastic changes to asset book values. We expect low to mid double-digit growth in loan book across the board”, the report stated.
With respect to base effect outlook in 2024, the report stated that growth rates will be affected by a high 2023 base and banks may record declines in profitability when compared to their 2023 performances.
The report thereafter noted that market yields are expected to remain high this year, despite the current economic challenges.
“This is due to factors such as the tight monetary policy that the Central Bank of Nigeria (CBN) is expected to sustain, as well as a sizable supply of Federal Government of Nigeria (FGN) paper which will be driven by domestic borrowings of around N6.1 trillion”, FBNQuest said.
SOURCE: THESUN
